What is it?

IR35 is a piece of legislation that came into force in April 2000 as an attempt by the government to curtail tax avoidance by companies paying workers ‘off-payroll’ as contractors via Personal Service Companies (PSC’s), they should have been set up as employees and subject to PAYE deductions.

The spirit behind the IR35 legislation is to do away with “disguised employees”.

Those working via a PSC as opposed to being an employee gain significant tax advantages. Likewise the engager, saves paying Employers National Insurance Contributions (NIC’s)

How is legislation changing?

Currently Directors of PSC’s are responsible for assessing whether the contract undertaken by their PSC is caught by the IR35 legislation.

From April 2020, the law will change the responsibility to the engager of the PSC to determine if the contract is caught by the IR35 legislation, if the engager is a large or medium sized company.

From April 2020 , if the company that engages the worker decides incorrectly that the contractor is self-employed, HMRC can investigate and insist on back payment of tax, as well as fines for late payment.

Timeline of IR35

2016 IR35 Announcement Public Sector

IR35 Changes rolled out to Public Sector. Shifting liability to Hiring Company when determining IR35 Status of contractor

2017 IR35 Rollout Public Sector

Online CEST tool used by companies to determine contractors who are in scope. Companies become liable for ensuring IR35 status is set.

2020 IR35 Rollout Private Sector

April 2020 new IR35 law comes into effect shifting responsibility of compliance to Hiring Companies.

*CEST - Check Employment Status for Tax

Who is now responsible?

Engager - End Client

Fee Payer - Agency/MSP

When the public sector reforms were introduced in April 2017, the legislation introduced the concept of “fee payer” and “engager”. The engager is responsible for assessing whether IR35 applies and the fee payer liable to make any withholding due.

Where an engager pays the contractor themselves, they will be both the engager and the fee payer under the legislation. Where an intermediary is used to make payments to the contractor (e.g. an agency/MSP), it will be the entity who makes the payments that is prescribed as the fee-payer.

They will be treated as making a payment to the worker which is to be treated as earnings from an employment if the manner in which the work is undertaken means that the IR35 legislation applies. It is this fee payer who bears responsibility for accounting for the PAYE/NIC due under the IR35 legislation and the liability where any failures arise.

However, the legislation also inserted a clause which states that if an engager fails to take reasonable care in coming to its conclusion as to whether the contractor is caught by IR35 then the liability is transferred to the client.

The technical consultation on off-payroll working, released on 5 March, provides further detail on the ’transfer of debt’ provisions that may be inserted into the private sector reforms due in April 2020.

Technical consultation (5 March)

The consultation released by HMRC provides an obligation for status determinations to be passed down the labour supply chain. Should a party in the supply chain fail to pass the determination onto the next party in the chain, they will initially liable for any unpaid PAYE income tax or National Insurance Contributions (NICs) due. HMRC have also sought to extend the transfer of debt provisions, stating that if HMRC fail to collect the liability from the party that failed to pass on the determination, the liability will transfer to the first party in the supply chain (eg the MSP). Failing recovery from the first party, the liability would then ultimately transfer to the engager.

How to prepare?


Most contractors will need to assess their current working relationships and contractual terms with their Client (Engager) be that direct with the end client or via a third party.

Most companies will be auditing their contractor workforce to understand roles that fall inside IR35 to evaluate their risk.

Companies shall look to make determinations and enforce a framework agreement with their contractors and third party agency suppliers.

Once these determinations have been completed the need to engage a payroll provider will be important. Understanding how PAYE and Employers NI is deducted, along with pension contributions and employment rights is important.

Make sure you understand these deductions, financially plan accordingly and work with a reputable PAYE provider.

How IR35 is determined

What determines being inside?

There are a number of factors that an Engager shall consider when making a determination. These include:

Right of Substitution/Personal Service

Is there a requirement for the worker's personal service?


Is there a sufficient degree of control over the worker?

Mutuality of Obligation

Are the mutual obligations of the contract consistent with employment?

Why are these three areas so important? Because if the answer to any of these questions is 'no', the contract cannot be an employment, whatever other terms it may contain.

This fundamental approach was originally set out by McKenna J in an employment status dispute between Ready Mixed Concrete (South East) Ltd and the Social Security Minister back in 1968. Since he gave his judgment in the High Court, it has received widespread judicial approval, and has been referred to as the 'safest starting point' when considering employment status.

So what can we derive from this? If a contract does not contain a requirement for personal service or there is insufficient control or there is a lack of mutuality of obligations the contract cannot be a contract of employment. There is no grey area, no weighing up of factors. If any part of this 'irreducible minimum' is missing the contract cannot be a contract of service.

Substitution / personal service

In order to remove any requirement for personal service there should be a complete (or not unreasonably restricted) right to substitute personnel, or even to assign or subcontract the services to another party altogether.

For example, if the contract enabled the company to utilise whoever it liked to perform the services, there would not be any requirement for personal service, and this would be inconsistent with an employment relationship.

However, in reality you are unlikely to encounter an unlimited right to substitute, so it is important to be aware of the how the law views restrictions on substitution rights.

In the case of McMenamin v Diggles (1991) a barrister's clerk had the right to send a substitute providing the substitute had at least 10 year's experience. This condition was not found to displace the right of substitution. This was affirmed in the later case of Express & Echo v Tanton (1999) where the right to send a substitute was not affected by the condition that the substitute had to be suitably qualified.

Therefore a term which read:

"The company may, at its discretion, send a substitute providing that the substitute has the required skills, experience or qualifications to carry out the services.”

would be acceptable.

If, however, the clause stated that the client had the right to reject a substitute, the client could still demand personal service by rejecting any substitute.


It is perfectly reasonable (and probably typical) in a self employed contract for services that there be a comprehensive job specification which outlines the service that is to be provided, where the service is to be provided and the hours during which it is to be provided. For there to be a contract of employment however, there must be a right of control over how the service is to be provided.

In the case of McManus v Griffiths (1997) a lady who supplied catering services to a golf club was found not to be an employee of the club. The courts found that although she supplied the services on their premises during the times required by the club and used the clubs equipment, the club had no control over the way in which she supplied the services and therefore she could not be an employee.

As an example, a contract which included the term:

"The client shall not control, nor have any right of control as to how the company is to perform the services. The client recognises that the company offers specialist services at a high level of expertise and as such the company cannot be told how to perform the services or the manner in which they are to be performed."

would contain an insufficient degree of control to be a contract of employment.

Mutuality of obligation

This is an area in which the Inland Revenue have been judicially criticised, and one which commonly causes confusion.

Within any contract there are various mutual obligations – the obligation to perform and be paid for performing would form part of any contract – but the mutual obligations needed for a contract of employment to exist consist of more that this.

A lot has been written on the subject of mutuality of obligations in the context of employment but instead of getting tied up in phrases like 'care and continuity' and 'trust and confidence' it is probably safer simply to look at the definition that has come out of the major case law decisions.

In cases such as O'Kelly v Trustehouse Forte (1983) and Carmichael v National Power (1999) the question asked was: is there an obligation to offer and an obligation to accept future work. In both cases the answer was no and therefore the courts found that there was not sufficient mutuality of obligation to form a contract of service.

Therefore, if a contract has a clause which reads:

"The client is not obliged to offer ongoing contracts or work to the company nor is the company obliged to accept such contracts or work if offered"

There can be no mutuality of obligation and therefore no contract of employment.

There are, of course, various other factors which may be taken into account when deciding status such as the intention of the parties and the level of financial risk undertaken, but the point to be remembered is this; if any part of the irreducible minimum is not present, then the relationship simply cannot be one of employer and employee.

Working inside IR35

From April 2020, the new legislation will place the burden for determining whether IR35 applies onto the private sector, and the engager of PSC’s if the engager is a medium or large company.

The Engager or End client is responsible for determining IR35 status of the worker (because the end client is best placed to establish employment status based on contract and working practices).

If inside IR35, the Fee Payer pays Income Tax and NICs (employers and employees) to HMRC this is done directly via Pay 25’s PAYE solution.

So what do I do with my Ltd Company?

As an aside, if you fall inside of IR35, your net pay through a Limited Company won’t be too dissimilar to that of an Umbrella Company because the same deductions for tax and NIC contributions must be made regardless. If you do fall inside of IR35, we would recommend using PAY 25 PAYE to process your payments because the additional workload involved in running your own business outweighs the minimal financial gains.

Working outside IR35

Where the end user of the worker’s services is a small business, it is confirmed that the responsibility for assessing the arrangements and applying IR35, will remain with the PSC. This will be the case even where the worker is provided via a third party such as an agency.